India ETFs Rise On GDP Surprise

India reported surprisingly strong GDP growth for the third quarter, posting 7.9% growth in the July through September period. These numbers surprised both analysts and government officials: the growth was higher than even the most bullish analyst forecast, and the Reserve Bank of India said that it will likely revise upward future forecasts. According to HSBC estimates, GDP grew at an astounding 13.9% rate from the previous quarter, with the gains largely coming from advances in the agricultural sector, high consumer demand, and government stimulus measures. These trends suggest that the Indian economy is humming along and that the government will soon begin to unwind stimulus measures and raise interest rates.Despite these positive GDP numbers, there are still numerous risks involved with investing in India. Some believe that an asset bubble is rapidly building, and that the growth in many emerging markets is fueled by easy credit and a carry-trade induced flight from U.S. dollar based assets. Many also are worried that if government programs are removed too early, it could shock the markets and derail India’s growth.

Despite these risks, the GDP numbers come as welcome news to many investors around the world who are growing tired of hearing “less bad news” and finally get some good news out of a major world economy. If the government is able to remove the measures from the market and begin to raise rates without disrupting growth, it would go a long way towards assuring investors that India is not only a growth market, but a country with sound monetary fundamentals.

Should India continue to be able to grow despite a stronger rupee and higher interest rates, it would suggest that the country is developing a consumer oriented middle class, a trend that could insulate the economy from major shocks and reduce its dependence on foreign economies. While many Indian stocks had a rough October, most have rebounded nicely in November and responded positively to the GDP news. For U.S. investors, there are several ways to gain exposure to India through exchange-traded products.

This fund is linked to the MSCI India Total Return Index, which seeks to measure the market performance of the National Stock Exchange of India. This index contains 59 firms with heavy concentrations in financials (25.7%), energy (17.6%), and information technology (15.4%). The fund is up almost 95% in 2009, but investors should note that it is structured as an exchange-traded note, meaning it carries some degree of credit risk. Moreover, the expense ratio of 0.89% is towards the high end of India ETF options.

This ETF started trading in mid-November, and as such has a limited trading history. INDY contains 50 stocks which are broadly diversified but with higher concentrations in the banking, software and energy sectors. The fund also focuses on mega-cap firms: the weighted average market cap is $24 billion. INDY also has an expense ratio of 0.89%.

EPI focuses on equities that are traded on Indian markets and are generating positive earnings. The index currently contains 187 firms and is tilted towards the energy, banking, software, and materials sectors, providing more diversification across the economy than other ETF options. The focus on profitable companies has resulted in this fund outperforming the MSCI India index by over 4% in the past year.

PIN is similar in many ways to INDY: both have around 50 securities (this fund has 49) and both have big weightings in banking, software, and energy firms. This ETF does however, have a lower expense ratio (coming in at 0.78%). PIN has gained almost 75% so far in 2009. The fund has a turnover of 22% and is skewed towards large and giant cap firms (a weighted average market cap of about $26 billion).

This fund seeks to match the money market rates available to foreign investors in India and reflect the changes in value of the rupee against the dollar. It has a relatively low expense ratio of 0.45% and is up slightly over 9.0% in 2009. The fund typically invests in currency swaps and forwards and money market securities with an average maturity of less than 90 days in order to reflect the Indian rupee money market.

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